Liquidation defines the legal dissolution of a company whose debts exceed its liabilities. It defines the orderly winding up of a company’s affairs and involves realising the company’s assets, ceasing or selling operations, distributing the realisation’s proceeds among creditors and distributing any surplus among shareholders. There are three types of liquidation: Creditors’ Voluntary Liquidation (CVL), Members’ Voluntary Liquidation (MVL) and Court Liquidation.
Liquidation is often a company’s final option and can stem from a number of scenarios. For example, a director might need to liquidate their company because it can no longer borrow money or obtain credit to continue operating. Perhaps the company is no longer economically viable because of rising operating costs, or the company may simply be dormant and requires de-registration.
Placing a company into liquidation may assist directors by:
- Having an independent liquidator take over communication with creditors;
- Mitigating the risk of an insolvent trading claim;
- Relieving stress by legally finalising the company’s affairs and facilitating de-registration of the company and cancellation of its Australian Business Number (ABN); and
- Suspending legal proceedings in progress against the company and preventing new legal proceedings from being commenced.
Liquidation is considered the final stage of company’s lifecycle, so it important to know how it works before moving forward.
Click on one of the options below for more information on the different types of liquidation.
A Creditors’ Voluntary Liquidation process is a type of liquidation designed to help successfully realise and liquidate company assets in order to satisfy creditors' needs. Creditors’ Voluntary Liquidation (also known as CVL) usually begins when company shareholders voluntarily agree to liquidation or when creditors agree to proceed with liquidation as a result of voluntary administration. The company must be insolvent in order to perform a Creditors’ Voluntary Liquidation.
When your company is insolvent, continuing to trade is not an option; a Creditors’ Voluntary Liquidation facilitates orderly asset sales to meet the demands of the company’s creditors. Electing to liquidate voluntarily is often the most efficient way to dissolve an insolvent company. Directors are likely to pursue this option rather than waiting for a court order, because no responding to insolvency can result in penalties under the Corporations Act 2001 (Cth).
Members’ Voluntary Liquidation allows directors to liquidate solvent companies. This type of liquidation is done for a number of reasons. Perhaps a company has simply reached the end of its usefulness or the directors and members have agreed to go their separate ways. Members' Voluntary Liquidation appointments are commonly made as part of the simplification of a group of companies to save on administration costs or to obtain tax benefits when distributing past profits to shareholders.
As the name implies, Court Liquidation is a court-ordered process that results from a creditor's request because they have determined a company is insolvent. Creditors may conclude that officially winding up a company is required because they have concerns or priorities regarding debt. However, creditors must be able to verify a company is insolvent before involving the courts,
Court Liquidation involves a court-appointed liquidator to administer the process. The Liquidator will thoroughly research the company's financial affairs, and distribute assets appropriately. They will also ascertain whether or not illegal or improper activities have taken place.